Global Tax Disclosure: A Question of Morality or Risk Management?

In light of the recent Panama Papers scandal, governments and financial institutions worldwide have upped anti-corruption on their priority lists. The European Union subsequently announced that it would be moving to clamp down on tax minimization and avoidance, and has put together an action plan towards combatting a lack of transparency from corporations and their financial/tax declarations. The UK also hosted a global anti-corruption summit last month, with the aim of tackling similar matters.

But a question comes to mind: should companies be more worried about their moral standing in the public eye or about preventing risks and avoiding financial penalties?

To shed some light on the matter, Lawyer Monthly has spoken to Toby Ryland, Partner at HW Fisher, an SME focused chartered accountancy firm in the UK. Toby specialises in corporate tax advisory work including mergers and acquisitions, due diligence, tax efficient structuring and consulting advice such as on R&D tax reliefs and the Enterprise Investment Scheme.

He is also an expert at advising overseas companies that are keen to invest in the UK and has assisted numerous businesses to successfully establish themselves in the UK. Toby is an experienced corporate tax partner and has worked with a wide range of businesses in many different sectors including technology, property and retail.

In terms of transparency, where would you say progress currently stands on this issue globally?

A growing number of countries is steadily upping the ante on tax disclosure, forcing companies to be more transparent about how and where they make their money. For instance at the start of 2016, the UK and the Netherlands introduced laws requiring larger companies operating across multiple jurisdictions to give full details of how the business is structured.

So in the case of Britain, this means that such companies must file tax returns to HMRC showing not just their UK revenue, but which also reveal the relationship between all sister companies and any subsidiaries across the international group. The thinking behind such moves is to prevent multinationals moving profits made in one country to another in order to avoid tax – a practice known as Base Erosion and Profit Shifting (BEPS).

However the ability of such measures to force transparency on sophisticated multinationals is limited, as so far only a few countries have signed up to them. Within the EU there is far from a common approach. Other European countries are at varying stages in the process of introducing similar measures. Austria and Hungary have not even begun, and the US has given no indication that it intends to do so.

Such measures can only be truly effective if all countries take them jointly, as anything less than a common front will allow companies to shift capital to ‘weak link’ jurisdictions where there is less transparency and thus avoid tax. International hopes rest with the efforts, led by the G20, to build a cross-border consensus on tackling BEPS – but despite several statements of intent, implementation is still some way off.

In reality this is a hugely difficult issue on which to find international agreement. Not only do tax laws vary hugely from country to country, so too do attitudes to both tax and government. But without coordinated action, the chances of BEPS being eradicated are limited.

Do you think the heart of this issue should focus on morality or just the pragmatic management of risk? Why?

It’s quite an emotive one really. I think the real danger is that focusing on morality is difficult because everybody has a different perspective, and so what’s a moral amount of tax for one company to pay will be viewed entirely differently from another company, and so we end up with just a huge amount of uncertainty as to what is the acceptable level of tax to pay. So, I think the better way is for a system that is clear and unambiguous, so that everybody knows where they stand, and what side of the line is acceptable and what is not.

There is always going to be a grey area somewhere, and I think the moral tone that’s been set over recent months or years, gives people far more of a steer. But differences remain when everybody, each as a taxpayer, has their own view. I’ve worked in the past with clients who just say ‘I’ll pay whatever tax I think is fair, 30 – 40%? That sounds fine to me’, but others are inclined to say ‘actually, why should I pay so much tax? The government is just going to waste it; it’ll be lost in inefficiency. I can create more wealth, more jobs, and better conditions for all of my employees if I pay less tax, because I’ll have more to re-invest in my business’. So I don’t think there will ever be a one-fits-all answer.

In your opinion, could reputational risk prove more effective than the threat of legal sanctions at persuading companies to fully disclose their tax affairs?

For some it may be, for others it will not. Businesses that are in the public eye rely on good PR and will not want to be splashed across the tabloids if they’re going to be seen to be doing anything that could be construed as tax avoidance. They are all already very aware of that, and we can see it with the voluntary payments made by companies like Starbucks, they will do anything to boost the public’s positive perception of them. So for them, it probably has changed their outlook and the way they operate, but then there are a significant number of other businesses who are either not really reliant on the public – such as pure business to business trades – who don’t have much in the way of a public image; they are far less likely to be influenced.

Also, we end up with a bit of a catch-22 for a lot of these businesses: do they not have a legal duty to maximize return to their shareholders? Could they voluntarily opt to pay more tax and not breach that duty?  It puts them in a very difficult situation. In some cases they would, when you look at certain types of companies like the Coop and John Lewis, they would probably want to be seen paying what’s due and beyond, and not cutting any corners. But in the case of others, and particularly those that may not be UK centric, it may be that the UK’s a relatively small section of their business, so they wouldn’t really care as much about taking the flack that comes with avoidance schemes or tax effective structures, and are likely to be far less influenced.

As to the EU’s curb scheme on tax disclosure, do you think the panama papers, in conjunction with Steve Wozniak’s recent comments on corporations having to pay more tax than they do, plus several other references to tax disparity worldwide, might push for a business tax reform? How do you think this might span across jurisdictions and what kind of time-scale might we see for a conclusion?

I think that’s certainly happening, and there’s been far more cooperation of late, particularly between the more developed countries’ tax authorities to try and actually come up with some sensible rules that would work universally in the modern world. But, whether we’ll get to a good outcome or not I do wonder, because there’s been a lot of commentary on all this tax avoiding – it’s terrible, it takes money away from developing nations, etc. – which is undoubtedly true, but when it comes to the point of the UK, US & Germany saying ‘well, we’ll forego some of the tax we could otherwise collect, to make sure businesses pay more taxes in countries in the developing world’; and that is a lot more difficult to see happening. It sounds great in theory, but when it comes down to it, everybody’s competing for the same pot of money.

We would be looking at quite a few years before we get a conclusion. It’s something that would probably start to develop over the next five years or so, but will continually be revised, and I think it will be many years into the future before we have anything that could vaguely be considered coherent. I think that’s largely because, you are going to have all different countries competing for the same tax money, and nations like the US are not likely to voluntarily pass up on money owed to them. Secondly, a lot of countries have very different outlooks on how the tax system should operate, who should collect the tax, and the UK seems to be moving further and further away from taxing corporates and businesses, and moving more towards taxing the individuals. So we’re seeing higher rates of income tax and VAT, but lower rates of corporate tax, mainly because of businesses being so mobile. Meanwhile you have nations like France that are very much towards taxing the employer and business, and will then spread that wealth throughout the population.

Do you think a sort of amnesty on tax disclosure could make a difference? (This is in reference to the US’ ‘Voluntary Disclosure Program’ which had very positive and impacting results) (Ref. companies voluntarily paying more tax than they absolutely have to – e.g. Vodafone’s decision to pay millions in corporation tax following the sale of its stake in the US carrier Verizon).

In the EU, it’s possible but I do not think this would help matters. I’m not really sure whether it would be the right way to go as taxes should be paid in accordance with tax laws that are clear and unambiguously set out how much should be paid. So if governments are looking to gain more income from corporate tax, they should amend laws in order to get it. As soon as you’re leaving companies to decide whether they should offer to pay more tax, or enable voluntary disclosures, it might go down well with the public, but again we’re back at the catch-22: what happens when the institutional shareholders demand a particular return or dividend, they’re not going to be happy when the Director turns around and says ‘well we can’t do that because we voluntarily paid more tax this year’.

Sophisticated tax accountants have made the most of loopholes for years, but could that finally change as the threat of reputational damage proves better at concentrating minds than the law?

This is the one area where I think reputational risk has actually worked very well. If you look at ten years ago, there were tax avoidance schemes that were ridiculously artificial, being offered by dozens of firms, including the really big players; that’s now almost completely eradicated, certainly in the UK. There are still a few boutique firms that, together with their clients, have a very different attitude to risk, and will still do some of these schemes. But on the whole, the mainstream firms have walked away from them now. Therefore I believe that this key shift has already happened amongst the professionals, so whether we need anything further, to legally stop firms offering these tax minimization arrangements, I remain to be convinced.

In terms of business sustainability, is there concern for paying tax towards those nations that the tax paying business then sources materials, assets or employees from?

Anything that will directly affect the business, people tend to be quite focused on and are probably happier to pay tax in that territory. Although this is a bit of a selfish way of looking at it, rather than for the greater good, it’s more along the lines of ‘do I benefit?’

However, there is more consciousness nowadays about sustainability and corporate social responsibility. But we often see that as soon as we hit a recession or a downturn in business, that’s one of the first things to go out of the window. So it’s great that companies, when they have the funds, will look to improving sustainability of resources and will push towards responsible decisions environmentally and in other matters, but I don’t think it’s likely one of the highest on their list of priorities.

Is there anything else you would like to add?

Is this whole process really going to get us anywhere? The reason for asking is that, once we may start out with an idea that we need to harmonize everything, stop profits being moved around, and everyone should pay their fair share of tax, we are going to come back to all of the world’s nations competing over that money. It’s always going to end up with legal loopholes that businesses can exploit, and we could end up going around in circles, resulting in as much planning and avoidance of tax payments as we have seen in the recent past, but just achieved in a different way.

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